How Much House Can I Afford?

The most basic research on homebuying will inevitably lead you to this general fact: houses are one of, if not the most, expensive purchases you’ll make in your lifetime. There aren’t many other opportunities to drop hundreds of thousands of dollars in one sitting… or over 30 years.

This is why setting a house budget is crucial in the homebuying process. Even more modest purchases, like a new car, require examining the bank account, debt and income situation. With a home purchase, this kind of serious financial evaluation is everything if you are to have any hope of success.

Follow the 36% rule

The 36% rule is the tried-and-true house affordabiltiy tip. Most financial advisers agree that people should spend no more than 36 percent of their gross income on total debt, this includes mortgages, credit cards, student loans, home insurance, medical bills and the like.

Depending on where you live, your annual income could be more than enough to cover a mortgage or it could fall short. Knowing what you can afford can help you take financially sound next steps. The last thing you want to do is jump into a 30-year home loan that’s too expensive for your budget, even if you can find a lender willing to write the mortgage.

Calculate the Cost

If your monthly income is $5,000 per month then your mortgage payment shouldn't exceed $1,400 per month. The calculator below allows you to plug in all the essential data to produce a budget estimate for how much house you can afford based on your income, down payment, and other expenses.

How much of my income should I spend on my house?

Financial experts generally advise that no more than 28 percent of your gross income should go to a mortgage payment.
This means if, after expenses and debt, your monthly income is $5,000 per month then your mortgage payment should not be more than $1,400 per month.
That said, everyone has different financial goals and lifestyle needs. Some folks choose to underspend on their house and use the extra money for investments or travel, while others might need more space due to family size. Be sure to factor in your long-term goals so you don’t get stuck with more house (and mortgage) than you need.

How much income do I need to qualify for a mortgage?

Many factors go into a lender’s decision to give you a mortgage. Among them are your credit score, debt-to-income ratio, employment history and income.
Qualifying income is not just employment salary but other sources such as alimony, royalties, Social Security and trust income. Lenders will tally total income, subtract your debt and use the remainder to determine how much you can afford.
Lenders generally use the 28/36 rule for underwriting. This rule states that a household should spend 28 percent or less of their gross income on total housing expenses, including things like HOA fees, home insurance and property taxes. Likewise, total household debt -- which includes everything from your mortgage to credit card bills and student loans, shouldn’t exceed 36 percent.

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